On the Margin
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Pricing gap between restaurants and grocers shrinks

Blog: Gap in prices hits lowest point in two years

This post is part of the On the Margin blog.

Commodity costs began easing in 2015, and grocers started lowering their prices. The result was a pricing gap with restaurants that widened to as much as 460 basis points during some months last year.

The pricing gap is getting much of the blame for a corresponding slowdown in restaurant traffic and same-store sales. Same-store sales peaked in January 2015, slowed throughout the year and turned south for much of 2016, and sales have been in decline since, according to all major industry same-store sales trackers.

So this should be good news for the industry: The pricing gap is narrowing.

In May, grocers cut prices by 0.2 percent, while restaurants continued raising them, increasing menu prices by 2.3 percent. The result: A gap of 250 basis points that was the narrowest since 2015.

Lynne Collier, analyst with Canaccord Genuity, said federal government forecasts suggest grocer inflation of flat to 1 percent this year, which could mean grocers will raise prices in the second half of the year.

The narrowing gap “will be an incremental positive for the restaurant industry,” Collier wrote in a note on Friday.

But that hasn’t happened yet: Same-store sales fell 1.1 percent in May, according to Black Box Intelligence, and traffic dropped an awful 3 percent during the month. 

Still, the prospect of higher grocery prices would be a welcome bit of news for a restaurant industry struggling to generate same-store sales and traffic over the past 18 months.

To be sure, we believe overall restaurant sales to be relatively healthy. Restaurant chains are opening locations at a brisk pace, particularly the smallest chains that are getting significant investment dollars. The increase in supply is ultimately having the biggest impact on chain-level restaurant traffic.

Yet historically, low commodity environments, like the one we’re in, impact restaurant sales, so the gap in pricing between restaurants and grocers likely reduced overall restaurant demand. 

If your steak is cheaper now than it was a few months ago, you might be more likely to have a meal at home tonight. Now numbers suggest that steak might get more expensive, which could take care of that problem.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Finance
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